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Performance Equity Compensation Matrix: performance units, shares options and more

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This is a one page reference tool providing an overview of the types of performance-based equity, the companies and individuals who use it and the issues (tax, accounting, legal, administration etc.) …

This is a one page reference tool providing an overview of the types of performance-based equity, the companies and individuals who use it and the issues (tax, accounting, legal, administration etc.) involved with these plans.

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  • 1. The Performance Equity Compensation Design and Use Matrix©2012  -­‐  Performensa0on  Consul0ng Toll  free  877-­‐803-­‐9255  |  Direct  415-­‐625-­‐3406email:  info@performensa0on.comweb:  www.performensa0on.comDescrip(onPrimary  Compensa(on  UseTypical  Plan  SponsorTypical  RecipientCommon  KPIand  MetricsKey  AdvantagesKey  DisadvantagesKeyAccoun(ng  IssuesKey  Communica(on  IssuesKey  Administra(on  IssuesPerformance  Awarded  SharesAward of restricted outstanding shares.Award size based on meeting definedgoals. Vesting is typically based on timeMotivate and RetainPublic companies with limitedability to define long-term KPIand metrics,but a need tomeet stock ownershipguidelinesUpper ManagementInternal and soft goals,including annualperformance reviews.Project oriented goalsincluding delivery dates andapprovals of new productsby regulatorsCommunicates value ofequity awards prior toaward date.Fairly easy totranslate dollar value toaward sizeIn down times awards may beseverely limited providinglittle in the way of retention.Award creates immediatedilution.Goals are usuallybased on a maximum term ofone-yearLiability accounting until awardis made. Fixed accounting afteraward is made. Generally noneed for valuation servicesCommunicating ahypothetical future awardcan be difficult andpotentially dangerous.Performance orientation isgeneral short-termPre-award information notkept in stock adminsystem.Accounting not fullysupported by any systemPerformance  Awarded  UnitsAward of Restricted Stock Units.Awardsize based on meeting defined goals.Vesting is typically based on timeMotivate and RetainPublic companies with limitedability to define long-term KPIand metricsUpper and MiddleManagementInternal and soft goals,including annualperformance reviews.Project oriented goalsincluding delivery dates andapprovals of new productsby regulatorsCommunicates value ofequity awards prior toaward date.Fairly easy totranslate dollar value toaward sizeIn down times awards may beseverely limited providinglittle in the way of retention.Goals are usually based on amaximum term of one-yearSimpleValuation. Complexaccrual. Expense booked isrelative to probable payout.Noexpense reversal if goals aremarket basedCommunicating ahypothetical future awardcan be difficult andpotentially dangerous.Performance orientation isgeneral short-termPre-award information notkept in stock adminsystem.Accounting not fullysupported by any systemPerformance  Leveraged  UnitsAward of Restricted Stock Units.Spread at vest is typically multiplied ordivided by factors of between 1 and 5,based on performance against goalsMotivatePublic and private financialfirms.Sales staff,marketdrivers,business-lineowners and otherswhere direct financialresults can be associatedto individualsSalesTargets orPerformance against growthor revenue goalsTop performers arerewarded in a meaningfulway. Bottom performersreceive limited payoutCorporate or market under-performance may result intop performers receiving lessthan intended. Leveragedmultiples must revisitedregularly and monitoredcloselySimpleValuation. Complexaccrual. Expense booked isrelative to probable payout.Noexpense reversal if goals aremarket basedPlans can be complex anddifficult to explain.Regular,interim communications area must.Unlikely to be fullyunderstood by shareholdersStock admin systems donot support.Dividends aredifficult to track.Difficult tocorrectly track proximityand remaining effort toreach goalsPerformance  Earned  UnitsAward of Restricted Stock Units.Shares at payout are determined as apercentage of shares awarded,asrelated to threshold,target ormaximum goalsAttract and MotivateEstablished public companieswith history to support long-term goal definitionUpper and MiddleManagementRevenue,RelativeTSR,EPS,Recruitment,Cost-cutting,EBITDACan set thresholds toensure payout even ifperformance is belowexpectations Excellentcommunication tool forhigh performanceComplex combinations ofmetrics and goal levelsrequire intensive analysis.Improper design or poorperformance can result instaff loss to competitorsSimpleValuation. Complexaccrual. Expense booked isrelative to probable payout.Noexpense reversal if goals aremarket basedRegular communicationrequired to driveperformance.Must provideproximity to goal and whatstill needs to be done toattain goalsStock admin systems donot support.Dividends aredifficult to track.Difficult tocorrectly track proximityand remaining effort toreach goalsPerformance  Accelerated  UnitsAward of Restricted Stock Units.Awardvesting is time-based,but can be movedforward if goals are metAttract,Motivate andRetainPublic or private companieswith goals that are bestattained in shortened periodsof timeUpper and MiddleManagement. Broad-based in certainindustriesRevenue,RelativeTSR,EPS,Recruitment,Cost-cutting,EBITDAProvides motivating factoron top of standardRestricted Stock UnitsMisaligned goals mayaccelerate awards too early,providing little or no long-term incentive or retention.Time-based element reducedoptics of performancemetricsSimpleValuation. Basic accrual ifgoals are not probable. Expenseacceleration if it is probable thatgoals will be met.No expensereversal if goals are marketbasedCommunication may beeasier than otherperformance awards. Mustprovide resource forexplaining potentialaccelerationStock admin systemspartially support these.Participant reports arelimited and vestingacceleration is largelymanualPerformance  Priced  UnitsVariable-priced units.Award price is setaccording to performance againstdefined goals or index of companiesMotivateCompanies with volatile stockprices where over or underpayout is a concernExecutives (C-Suite) Revenue,RelativeTSRProvides moderate payoutvehicle for unpredictablecompanies or markets.Can be seen as demotivatingwhen price becomes too highin relation to expectationsComplex valuation. Complexaccrual..Complicated to explain andmanage.Participants mustbe "in the loop" to truly bemotivated by these types ofplansNo systematic support.Reporting must be customcreated and managedmanuallyIndexed  Op(onsVariable-priced Stock Options. Exerciseprice linked to performance to apresent index or group of peersMotivate andAttract.Useful for attraction whencompany is seen asoutperformingcompetitors in futurePublic companies whereperformance against peers hasbeen strong. Companieswhere over-payout has beensuspectedExecutives (C-Suite)Peer Group Performance,Performance against specificindustry index,Performanceagainst general marketindexShareholder friendly andunderstood. Ensures thatpayout is relative to marketperformance as a wholeParticipants view these arelimiting. Over-performancemay result in less than desiredpayout. Peer groups can bedifficult to defineValuation can be complex.Accrual is generally simple ifgoals are clearly understood.Difficult to communicatethe value relative tocompetitor awards if theyare not also indexed.Canprovide competitorrecruiting toolStock admin systems offerlittle or no support forvariable-priced options.Typically all admin isperformed on spreadsheetsbetween grant and vestdatesPerformance  Granted  Op(onsGrant of Stock Options.Grant sizebased on meeting pre-set goals. Vestingis typically based on timeMotivateCompanies with limited abilityto define long-term KPI andmetrics, where options aremore highly valued than unitsUpper ManagementInternal and soft goals,including annualperformance reviews.Project oriented goalsincluding delivery dates andapprovals of new productsby regulatorsCommunicates value ofequity awards prior to grantdate.Improves optics ofgrant size to participantsComplex formula needed toconvert performance goalinto a combination of sharesand exercise price. Notbased on a long-term goalLiability accounting until awardis made. Fixed accounting afteraward is made. Generally noneed for valuation servicesCommunicating ahypothetical future awardcan be difficult andpotentially dangerous.Performance orientation isgenerally short-termPre-grant information notkept in stock adminsystem.Accounting notsupported well by anysystemPerformance  Accelerated  Op(onsGrant of Stock Options.Grant vesting istime-based,but can be moved forwardif goals are metAttract,Motivate andRetainPublic or private companieswith goals that are bestattained in shortened periodsof time. "Tech friendly" designUpper and MiddleManagement. Broad-based in certainindustriesRevenue,RelativeTSR,EPS,Recruitment,Cost-cutting,EBITDA,Stock Price overgiven period of timeEnsures vesting regardlessof performance.Easilyunderstood by participantswith little downsideReduces impact ofperformance on grant sinceshares will vest if participantremains eligible. Doublehurdle for participantsMay require complex valuation.Expense may be less due topotentially shortened life.Expense may be more due topotentially fewer forfeituresCommunication is easierthan other performanceawards. Must provideresource for explainingpotential accelerationStock admin systemspartially support these.Participant reports arelimited and vestingacceleration is largelymanualPremium  Priced  Op(onsGrant of Stock Options. Exercise priceis set to a price higher than currentFMV. Typical plans set price at a10%-15% premiumMotivateCompanies emphasizingsuperior returns,or whencurrent stock price has beenreduced significantly by marketpressuresUpper and MiddleManagementStock Price growthShareholder friendly andunderstood.Easy toadminister.May havereduced expense impactCreates double hurdle forparticipants. Very lowperceived value until optionsare in the money.Valuation requires additionalanalysis. Potentially longer lifeincrease value.Spread at time ofgrant reduces value. Accrual isbasicCommunication is easy atgrant.Difficult as timeprogresses,unlessperformance meets goals.Can provide basis forcompetitor recruitmentSupported fairly well bymost stock admin systems.Optics showing growth andmovement to being in-the-money is limitedPerformance  Earned  Op(onsGrant of Stock Options. Optionsavailable to be exercised aredetermined as a percentage of totalgranted,as related to threshold,targetor maximum goalsMotivateEstablished public companieswith history to support long-term goal definitionExecutives (C-Suite)(complex goals). Broad-based (simple goals)Revenue,RelativeTSR,EPS,Recruitment,Cost-cutting,EBITDA,Stock Price overgiven period of timeEnsures that options onlyvest if performance isattained.Shareholderfriendly.Payout in goodsituations can be higherthan standard optionsDouble hurdle forparticipants.Difficult to seteffective goals.Valuation iscomplex.Difficult to trackapproved pools of sharesCost of plan difficult to predictuntil all variables are known.Goal type drives whetherexpense can reversed if missed.Generally requires complexvaluationRegular communicationrequired to driveperformance.Must provideproximity to goal and whatstill needs to be done toattain goalStock admin systems donot support.Difficult tocorrectly track proximityand remaining effort toreach goalsEquity  TypesIssues  andFeatures

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